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The Stock Market and the Economy's Apparent Disconnect

The imbalance between the Dow and the economy has an explanation. And it won’t go on forever
The Stock Market and the Economy's Apparent Disconnect
Illustration by Erik T. Johnson

When he’s talking to his fellow economists, Roger Farmer describes the stock market and the economy as “co-integrated random walks.” For lay audiences he prefers a clarifying metaphor: two staggering drunks connected by a long rope. Sometimes the stock market and the economy go in the same direction, sometimes not. But tied together as they are, they can never get too far apart. “The relationship has been quite strong,” says Farmer, a Briton who teaches at the University of California at Los Angeles. “It’s one of the most stable things I’ve seen in the postwar period.”

Keep those lurching lushes in mind as you try to make sense of the Dow Jones industrial average. It set records five days in a row in early March even though unemployment remains high, corporate profits seem to be topping out, and across-the-board federal spending cuts are beginning to bite into growth. Will the rally in stocks inspire confidence and pull the real economy higher? Will the sluggish economy drag Wall Street back to reality? Or is there still enough slack in the rope for the two to stagger along in different directions for a while?